CARICOM: Implementation of Scheduled Reductions in
the Maximum Rate of the Common External Tariff

III

12.

CARICOM: Trade Flows

IV

13.

Caribbean Region: Medium-Term Macroeconomic Projections

Statistical Appendix

A1.

Caribbean Countries: GDP by Sector of Origin at Current Prices

A2.

Caribbean Countries: GDP by Sector of Origin

A3.

Caribbean Countries: Gross Tourist Receipts

A4.

Caribbean Countries: Stayover and Cruise Tourist Arrivals

A5.

Caribbean Countries: Stayover Tourist Arrivals

A6.

Caribbean Countries: Cruise Passenger Arrivals

A7.

Caribbean Countries: Number of Hotel Rooms

A8.

Caribbean Countries: Principal Exports

A9.

Caribbean Countries: Indicators of Export Performance

A10.

Caribbean Countries: Imports by Economic Use

A11.

Caribbean Countries: Trade Balances

A12.

Caribbean Countries: Exports and Imports of Goods and Nonfactor Services

A13.

Caribbean Countries: Current Account Balances

A14.

Caribbean Countries: Gross Domestic Investment

A15.

onsolidated International Claims of BIS Reporting Banks on Caribbean Countries, June
1999

A16.

Consolidated International Claims of BIS Reporting
Banks on Caribbean Countries by Sector, June 1999

A17.

Caribbean Countries: Grant Receipts

A18.

Caribbean Countries: Banking Intermediation

A19.

Caribbean Countries: Central Government Balances

A20.

Caribbean Countries: Central Government—Total Revenue
and Grants

A21.

Caribbean Countries: Central Government Expenditure

I. Overview

With few exceptions, countries in the Caribbean region have performed reasonably well in
recent years. They will, however, need to accelerate policy actions in a number of areas to address
the challenges they are likely to face in the near future.

This occasional paper focuses on the independent states that are full members of the
Caribbean Community (CARICOM), namely Antigua and Barbuda, The Bahamas, Barbados,
Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, Suriname, and Trinidad and Tobago.1 It
provides background information on recent developments in the Caribbean region and lays out the
principal policy issues that countries will need to address in the period ahead. The Caribbean
countries2 face a number of common problems and must
deal with similar economic policy issues. Consequently, concentrating on the regional perspective
permits a comparison of the individual responses to similar problems. The regional view would
also throw light on the countries' movement toward convergence.

Background

Countries in the Caribbean region are small in size, but heterogeneous in structure. Their
growth performance was mixed in the 1990s: Belize, Trinidad and Tobago, and member countries
of the Organization of Eastern Caribbean States (OECS)3
enjoyed relatively strong growth, but performance in the others has been uneven. Jamaica has
experienced negative growth since 1995.

Caribbean countries have made some progress in diversifying their economies, but production
and exports are still relatively concentrated in a few activities. Agriculture and mining remain
important in many countries, but the structure of production has begun to shift more heavily
toward services. While the number of tourists to the Caribbean has grown in the latter part of the
1990s, growth in tourist receipts has not kept pace with nominal GDP. Growth in the sector has
been adversely affected, in part, by natural disasters in the last few years. The market share of the
English-speaking countries within the broader Caribbean region has been falling in the 1990s.

Countries in the region are highly open. The principal destinations for the region's exports
include the United States, Europe, and other CARICOM countries. Exports are concentrated in a
few products, namely raw materials—particularly minerals—and agricultural crops.
Imports consist mainly of manufactures, especially consumer goods.

The region's agricultural exports are characterized by high production costs and are sold in
protected markets. Caribbean countries have traditionally relied heavily on a system of preferential
access to markets for commodities such as bananas and sugar. Most of the countries have large
and persistent trade and current account deficits, despite significant current transfers and
remittances in some cases, but these deficits have been financed by private capital inflows
(including foreign direct investment and commercial borrowing) and, to some extent, official
grants.

The commitment to a fixed exchange rate by many of the small island economies in the region
has been a key factor in creating a stable macroeconomic framework and in keeping inflation close
to international levels. In recent years, all countries (except Suriname) have successfully reduced
inflation to single-digit rates. There has been a general trend toward appreciation in the value of
the U.S. dollar vis-à-vis other major currencies.

The banking sector in the region is relatively well developed, compared with other developing
countries, but real interest rates remain high because of high reserve and liquidity requirements,
generally conservative monetary policies, and—in some cases—large fiscal imbalances.
The cost of banking services is relatively high because of the lack of economies of scale, relatively
undiversified loan portfolios, and the oligopolistic nature of banking in the region.

In the 1990s, fiscal deficits in the region tended to widen. The average central government
deficit rose to 4½ percent of GDP in 1998 from 2 percent of GDP in 1994, mainly as a
result of increases in expenditure. Increases in public sector wage bills contributed importantly to
the overall increases in expenditure.

Caribbean countries have embarked on a process of economic integration toward the
formation of a common market. The area where perhaps the most progress has been made is in
trade liberalization. Progress toward fiscal harmonization, adoption of a common currency, and
creation of a monetary union have been slower. Since most Caribbean countries trade with
countries outside the region, the gains from forming a common market are likely to be small until
intraregional trade expands. Furthermore, complex issues regarding convergence to common
targets (e.g., on the size of fiscal deficits and the debt-to-GDP ratio) are likely to arise, given the
differences that exist across countries in the region.

Challenges Facing the Region

Despite the successes in the 1980s and 1990s in reforming their economies and broadly
satisfactory economic performance, Caribbean countries remain vulnerable in a number of ways.
Because of their relative openness and concentration on a small range of products, exogenous
changes in the terms of trade can have significant effects on their fiscal and external positions.
Also, many countries that rely on preferential trading arrangements for their exports are likely to
be facing a progressive erosion of these preferences. In addition, occasional natural disasters, such
as hurricanes, have the potential to cause serious setbacks for these countries.

In light of their vulnerabilities and the risks to the economic outlook, Caribbean countries will
need to take stronger measures to preserve the economic gains made in the past two decades and
to provide some measure of insurance against future external shocks. They will need to accelerate
policy actions in a number of areas to address the challenges they are likely to face in the period
ahead. Specifically, these countries would need to:

Deepen financial markets and improve banking sector efficiency, thus reducing
the costs of financial intermediation in the region. For this purpose, governments should
accelerate privatization of state-owned financial institutions, reduce barriers to entry for new
banks that meet prudential standards, and strengthen banking supervision, and privatization of
public enterprises.

Expand trade liberalization to increase the net benefits for the region by further reducing the
cost of imports and improving the allocation of resources. Countries will also need to address the
likely loss of revenue from liberalization through reforms to their tax systems that broaden and
deepen domestic consumption taxation, including introducing a VAT where feasible.

Improve external competitiveness so as to accelerate growth and reduce unemployment.
This can be achieved by restraining production costs, particularly by keeping wage increases in
line with growth in productivity.

Dampen the impact of external shocks by diversifying the structure of exports.
Diversification can be encouraged by removing mechanisms that impede markets from working
efficiently, such as wage and price controls and restrictive labor laws. Governments should refrain
from using subsidies or other incentives that encourage activities for which the country does not
have a comparative advantage.

Economic Outlook for the Region

Economic prospects for the region are generally favorable, as growth will likely accelerate
somewhat and inflation will remain low over the medium term. Faster growth is likely to come
from a number of factors, including higher investment in the energy and tourism sectors and
stronger agricultural performance.

The inflation differential with the United States is expected to narrow, resulting in some gains
in competitiveness for the region. The combined external current account deficit is likely to
improve over the medium term, based on fairly robust growth in the region's export markets and
higher prices for the region's major exports. Fiscal balances also are expected to improve, based
on strong economic growth and the containment of public sector employment.

This outlook, however, is subject to a number of risks, including slower growth in major
export markets, the effects of unpredictable natural disasters, and possible adverse terms of trade
shocks.

Section II of this occasional paper discusses the structure of the Caribbean economies in
broad terms. Section III presents selected issues facing these countries in greater depth and
provides some cross-country analysis. Section IV outlines the economic outlook for the region,
focusing on broad economic aggregates and potential risks. Section V contains the main
conclusions.

1The Bahamas is a member of
CARICOM but not the Common Market. Haiti is in the formal process of becoming a full
member of CARICOM. CARICOM also includes four U.K. territories: Montserrat and Anguilla
are members, and the British Virgin Islands and the Turks and Caicos Islands are associate
members. Negotiations for a free trade agreement are ongoing between CARICOM and the
Dominican Republic, which is, among other Western Hemisphere countries and territories, a
CARICOM observer.2In this paper, "Caribbean countries" refer to the group of
independent states that are full members of CARICOM.3OECS membership includes six independent
countries—Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St.
Vincent and the Grenadines—and two U.K. territories—Anguilla and
Montserrat.